Should We Continue To Count On Employers For Retirement Provision?

Yes, this is a question. It's not even a rhetorical question. It's something that I ask myself, and I invite readers to think about.

We take the so-called "three-legged stool" a bit for granted, don't we? Employers historically provided pension benefits for their employees, in a time and a place when it made sense for them to do so, when they relied on those pensions to scoot aging employees out the door at a traditional normal or even early retirement age, when they perceived of full-career employees as highly valuable, and when the state of funding requirements, longevity expectations, investment and risk attitudes combined together to create the expectation that pensions were a relatively affordable and low-risk means of achieving their business objectives. Now employers have shifted almost universally to 401(k) or other forms of Defined Contribution retirement benefits. But it's still taken as a given, among those who discuss retirement provision, that employers, second only to the government, should be the chief providers of retirement accruals to workers.

I'd like to offer some pros and cons to maintaining this status quo.

Pros

Employees are a captive audience. Not only can employers provide enrollment forms as a part of their new hire packet, but they can provide continued communications over time. And because of the protections provided by legislation, employers can use automatic features to increase participation in 401(k) plans in ways that a financial advisor setting up shop and handing out business cards just can't do. They can auto-enroll employees into the company 401(k) plan at a given contribution rate, so that employees need to take the active step of changing or canceling their contributions. They can auto-escalate, that is, increase the contribution rate over time, with employees needing to actively make a change to avoid it. And they can default employees into investment funds appropriate for their age, with greater levels of risk and expected return for younger employees. These are all very powerful tools.

Low-income employees in particular may be disconnected enough from other forms of investing and saving that there is not particularly good way of replacing the employer’s role. A 401(k), that is, retirement savings through one's employer, may not just be the only realistic means of retirement savings, but, for the un- or under-banked, or indeed those who live paycheck-to-paycheck, this may be the only sort of savings these workers have at all, to the extent that these employees wouldn’t seek out other financial institutions, or if, due to low account balances, such institutions wouldn’t be interested in them, or would charge high enough fixed fees to severely hamper their savings.

Employers are also able, if they're large enough to have sufficient bargaining power, to select low-fee fund options for their employees, and even work with consulting firms to identify the best methods of helping their employees save for retirement, to get the most "bang for the [employer contribution] buck." They may provide online modelers and other sorts of advice -- though this may come at a cost for the employees, taken as fees from their accounts.

And it goes without saying that the matching contributions that employers offer can be a strong incentive for retirement savings. It may be that, in a world without employer-sponsored plans, that money would be redirected into pay increases or other benefits, but the incentive for employees to contribute (with the typical advice being, "always contribute at least enough to get your employer's match") would be lost.

Cons

Yes, there are some real disadvantages to our employer-centered retirement saving system.

To begin with, an employer-based system misses those without conventional employment (part-timers, freelancers, contractors, small business employees or owners), and a system generally structured around employers can make it difficult for these workers to find their way. Now, as it happens, the fears that we are turning into a "gig economy" with large portions of the workforce making their way as freelancers, Uber drivers and the like, turned out to have been overblown — as reported by the New York Times, the percentage of workers working in "alternative work arrangements," a category which encompasses all of these insecure incomes, didn't just hold steady but dropped slightly from 11% to 10% since 2005. But there are considerable numbers of workers, while in traditional "employee" arrangements, who lack workplace retirement plans; in fact, among all private-sector workers, about half lack such access.

There are indeed efforts to ensure that conventionally-employed workers at businesses too small to easily offer 401(k)s have access to retirement savings, with legislative proposals aimed at making it easier for employers to do so (see this summary at J.P. Morgan), and state initiatives such as that of Oregon to auto-enroll employees in state-managed IRAs. But is all that effort at shoehorning more workers into an employer-based retirement system the most effective approach in the long term, or is there a better alternative?

It is also the case that each of the remaining items in the "pros" column has a corresponding disadvantage. The very employer match that serves as an incentive to make a contribution, can act as a ceiling, in which employees take the match as the recommended maximum contribution level. The default contribution levels may be right for the average employee but not for any given individual employees, especially since saving needs vary by pay levels (due to relative differences in Soc Sec pay replacement) as well as other variations in life circumstances. And for every employer who seeks out the funds with the best value for the money, for their employees, there's another who has other things on his mind.

All that being said, what is the alternative? Is there an alternative? Let's save that for another column.